Last Updated: 15 June 2022
The bitcoin price is dropping towards the $20,000 mark this Wednesday morning. There is renewed unrest due to a possible bankruptcy of Three Arrows Capital (3AC), a major lender and crypto fund on the market.
3AC is in deep financial trouble due to falling prices on the crypto market. The Singapore-based company is a shareholder in the Dutch options exchange Deribit, among others.
A very cryptic statement
Co-founder Su Zhu, a well-known market commentator, made a very cryptic statement on Twitter on Tuesday night.
We are in the process of communicating with relevant parties and fully committed to working this out
— Zhu Su 朱溯 (@zhusu) June 15, 2022
Following this tweet, rumours abound that 3AC is in deep trouble. They are a lender in the world of decentral finance. They provide capital to parties like Celsius who are looking for more return in the market. But now 3AC as a lender is also in trouble because it cannot meet its obligations.
Because they too have hundreds of millions of dollars worth of bitcoin, ether and other cryptocurrencies locked up in contracts. With falling prices, these contracts are at much greater risk of being liquidated. The search for more return is a very risky game that goes well as long as the prices rise. But as soon as prices fall in this fierce macro environment, one problem arises after another.
And although the system failure has nothing to do with bitcoin’s protocol, as it is ‘rock solid’, this avalanche could lead to a further drop in bitcoin prices.
There is a daisy chain of borrowers and lenders in the crypto space — most well capitalized, but some are not
Lots of leverage still in the ecosystem…including in some non-obvious places
Important to understand counterparty risk and where are the weak links in the chain
— Barry Silbert (@BarrySilbert) June 24, 2021
The company may have tried to limit the damage by trading on Bitfinex in May and June. However, the reporter Wu Blockchain reports that a lot of money was lost on this exchange as well. The loss was in the tens of millions of dollars.
But why is this a bigger problem than Celsius? 3AC is a lender to many (medium) sized players on the market, such as Celsius, but also BlockFi, Nexo and Genesis. An even bigger bank than Celsius is.
The rumours started after Zhu removed all mentions of investments in ether and other smaller projects. He left only bitcoin (BTC) in his bio. His companion Kyle Davies was also inactive on Twitter for at least three days.
Currently, the crypto market is in heavy weather. It started with the evaporation of several billion dollars in the Terra ecosystem at the end of May. It was followed up with cryptobank Celsius which had to stop all transactions on its platform due to financial problems. Companies like Coinbase, Gemini and Crypto.com are forced to cut back and have announced rounds of layoffs.
It was Barry Silbert who warned about the flaws in the crypto-ecosystem already last year. Macro developments are also playing tricks on the market. There is simply less money on the market and investors are removing risky assets from their portfolios.